Should We Be Thanking the Government for the Bailouts?

Was the unpopular, much-maligned Troubled Asset Relief Program—better known as the bailout—a secret success? A Politico story by Ben Smith
suggests it was, though few political leaders are willing to say so. TARP, he writes, has become a handy tool
for attacking the Obama administration and "elites and insiders of all
kinds." But it was actually constructed under Bush, and according to
experts he talks to, "succeeded far beyond expectations." Its
demonization has more to do with politicians' fear (and exploitation)
of angry populist voters, suggests Smith, as well as its "conflat[ion]
... with the stimulus, a piece of policy whose supporters and foes have
fallen into a much more familiar debate about the role of government
and public spending." He notes that polls show the public "has only
the haziest view of what TARP was."

Some finance and politics bloggers, however, strongly
disagree with Smith on the legislation's merits. Meanwhile, a
Congressional Oversight Panel report on TARP has criticized the Treasury department's "largely ineffective communication" of the reasoning behind the bailout.

'Put Simply, It's Not a Success' TARP's bad reputation is deserved, declares Marshall Auerback,
analyst and hedge fund manager, posting at Naked Capitalism. "Virtually
all of the goals of TARP could have been achieved via regulatory
forbearance, rather than government bailouts," and for some reason
nobody now "mention[s] the fact that the banks have basically been able
to engage in perpetual backdoor bailouts via Fannie and Freddie." In
addition, "Ben Smith seems to forget that Congress adopted unprincipled
accounting principles that permit banks to lie about asset values in
order to hide their massive losses on loans and investments, which
allowed them to raise the capital." His conclusion:

Calling
the TARP a success is like claiming your wastrel son is getting his
life together because he's settled his gambling debts, while omitting
that you are paying for his apartment, got him an overpaid job at your
company, and are handing him $100 bills more than occasionally. Indeed,
the only way to call TARP a winner is by defining government sanctioned
financial fraud as the main metric of results.

More Holes in the Story Finance blogger Edward Harrison
at Credit Writedowns points out that "TARP and the associated bailouts
relied on hidden costs in the form of zero interest rates and a steep
yield curve, borrowing for cheap rates against less than stellar
collateral, and regulatory forbearance." He thinks the Politico story
is a little too tinged with politics. Tim Cavanaugh
at Reason agrees, writing that "some of the facts [in the story] are
wrong: 'The banks at the center of TARP' have not 'paid the money back'
unless Citi has stopped being a bank."

Success Isn't Just Absence of Disaster The American Spectator's Joseph Lawler
doesn't appreciate Smith's argument that TARP saved the economy from
disaster: "if the counterfactual really were the apocalyptic scenarios
posited by Smith's sources--Alan Blinder and Mark Zandi reference 25
percent unemployment, and Smith himself invokes the image of 'breadlines and catfood'--then almost any measure taken to save the banks would have been a success, by their standards."

A Good Policy That Hasn't Become Good PoliticsDaniel Drezner of Tufts University,
writing at Foreign Policy, seems to agree that TARP was a success, calling it "one whopper of an exception to [the] general rule" that
"a policy [that] actually yields concerete and positive results ...
should be perceived in a more favorable light." This is troubling, he
adds: "Over the long run, good policy should translate into good
politics."

Necessary, Poorly Managed, May Hurt Government Ability to Respond in the Future, decides the Congressional Oversight Panel
in their report. The economists they consulted may have differed on
many things, but they agreed on this much: TARP was both necessary and
badly executed. The "capital injections," a.k.a. bailout-style
strategy, "followed by the rollout of numerous seemingly unconnected
programs, combined with largely ineffective communication of the
reasoning behind these actions" confused people and "undermined trust
in the TARP." In addition, a "significant moral hazard" issue was
created by the government's failure to "impose ... stringent costs upon
TARP recipients." The government saved the firms very nearly for free,
essentially. Here's the troubling conclusion:

The
program's unpopularity may mean that unless it can be convincingly
demonstrated that the TARP was effective, the government will not
authorize similar policy responses in the future. Thus, the greatest
consequence of the TARP may be that the government has lost some of its
ability to respond to financial crises in the future.

This article is from the archive of our partner The Wire.

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